Looking for an Exciting Summer

Searching for Alpha, the monthly index newsletter for June 2005

With the throngs of investment bankers and traders taking their annual pilgrimage to the Hamptons, summertime is typically a slow period for Wall Street. I suspect that 2005 will be an exception to the low volume and muted volatility typical for this time of the year.

One reason I'm looking for a heightened trading environment is the fact that most hedge funds haven't made money so far this year. The biggest part of a hedge fund manager's compensation is the performance fee. With nothing to show for their efforts this year, hedge funds will likely be working overtime over the next few months to turn the year around. Considering the amount of leverage some of these funds employ, that could translate into a considerable increase in liquidity.

The recent strength in bonds could be another driver of increased activity. There is much confusion over why the long end of the yield curve is so resilient. Some believe that lower yields are the result of a "Goldilocks" economy that is growing at a just-right pace that makes further rate increases unnecessary, while others feel that a pending recession is in the cards. In any event, market strategists will likely spend the next few months placing their bets with the expectation of resolution in the latter part of the year.

Finally, leadership from technology stocks is starting to convince some that a medium-term rally is a distinct possibility. Increased merger activity and higher home prices also point to better time ahead.

Whatever the outcome, the stock market should be anything but boring this summer.

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Index

size="-1">May-05

size="-1">QTD

size="-1">YTD

size="-1">Description

size="-1">S&P 500 Index*

3.00%

0.93%

-1.68%

Large-cap

stocks

size="-1">DJIA*

2.70%

-0.34%

-2.93%

Large-cap

stocks

Nasdaq

Comp.*

7.63%

3.45%

-4.93%

Large-cap tech

stocks

Russell 1000

Growth

4.84%

2.85%

-1.36%

Large-cap growth

stocks

Russell 1000

Value

2.41%

0.58%

-0.66%

Large-cap value

stocks

Russell 2000

Growth

7.05%

0.24%

-6.60%

Small-cap growth

stocks

Russell 2000

Value

6.10%

0.63%

-3.38%

Small-cap value

stocks

size="-1">EAFE

1.53%

-0.74%

-2.18%

Europe, Australasia & Far East

Index

Lehman

Aggregate

1.08%

2.44%

1.96%

U.S. Government

Bonds

Lehman High

Yield

1.78%

0.79%

-0.84%

High Yield Corporate

Bonds

Calyon Financial Barclay

Index**

-0.43%

-2.08%

-3.80%

Managed Futures

size="-1">3-month Treasury Bill

1.07%

All returns are estimates as of May 31, 2005. *Return numbers do not include dividends. ** Returns are estimates as of May 30, 2005
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